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Edited version of your written advice
Authorisation Number: 1012928642240
Date of advice: 16 December 2015
Ruling
Subject: Grant payment
Question 1
Is the funding amount derived and assessable at the time of receipt?
Answer
No.
Question 2
Is the funding amount derived and assessable at the time the funds have been expended in accordance with the terms and conditions of the agreement?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 20XX
Year ending 30 June 20XX
The scheme commenced on
1 July 20XX
Relevant facts
Entity A submitted an expression of interest form and later an application to a government department for a grant (the Grant).
The Grant was approved. The Agreement was signed by the entity and the relevant Department.
The Funding Agreement outlines the milestones and repayment clauses that apply to the project. A quarterly progress report is also required. Where, a non-compliance occurs, entity A, may be required to repay the funds. Repayment may also be required if the terms and conditions of the agreement are breached.
An amount of money was deposited into entity A's bank account on 30 June 20XX.
The Grant Funding is capped. Any additional costs are to be incurred by entity A.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
The Commissioner's view on the assessability of government payments to industry are set out in Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business.
As outlined in paragraph 12 of TR 2006/3, a government payment to industry to assist with business operating costs or liabilities is ordinary income in the hands of the recipient and is assessable under section 6-5 of the ITAA 1997 in the income year in which it is derived.
In this case, the grant is paid to help with the project. Entity A applied for the grant to help with the project.
The financial assistance provided under the funding agreement will assist entity A's costs and has the character of ordinary income. Therefore the amounts paid under the funding agreement are assessable under section 6-5 of the ITAA 1997 in the income year it is derived.
We therefore need to consider the terms of the funding agreement to determine when entity A derives the amounts.
Paragraph 23 of TR 2006/3 states that government financial assistance to business is sometimes provided on terms where the amount must be repaid unless the recipient meets agreed conditions within a specified period. The grant becomes unconditional when the recipient satisfies the required conditions of the agreement with the funding authority. It is at this time that the payment is taken to be received and not at the time the conditional grant was paid. That is, a conditional grant is assessable when it is no longer conditional or subject to repayment.
In this case, the payments under the funding agreement are being made in instalments. Entity A entered into the agreement on the basis that they will implement an agreed project. The grant instalments are conditional upon the Department being satisfied that entity A has complied with all of its obligations under the agreement. The Department may request repayment if the necessary conditions are not met.
After considering the specific terms and conditions of the funding agreement, it is considered that the payments are a conditional grant. Therefore the conditional grant is derived in the income year in which it is expended, in accordance to the terms of the funding agreement.
That is the instalments under the agreement are not derived as income on receipt. Rather, the instalments are assessable income under section 6-5 of the ITAA 1997 when, and only to the extent, in an income year, they are applied towards the conduct of the project as set out in the agreement.
Therefore the amount of money is not assessable income in the relevant financial year. Rather it is assessable when the relevant terms and conditions have been met and no longer subject to repayment.